July 26, 2008

Say Goodbye to Seller-Funded Down Payment Assistance

Seller-funded down payment assistance programs (DAP) in FHA loans are currently the only true "zero-down" mortgage option for home buyers, as the conventional market has shifted to requiring at least 5% skin in the game. Many have pontificated that the FHA would attempt to eliminate this type of financing due to its high default rates, which threaten the solvency of the entire FHA.

Well, the day has come. As part of the forthcoming congressional housing stimulus package, DAP will be gone as of October of this year. Hate it or love it, American consumers now really, truly, honestly, legitimately, must again compile a sizable nest egg to finance the purchase of a home.

Short-term: this is going to cause some more pain in the market and choke off further first-time home buyer activity, as well as potential move-up and move-down buyers who lose their equity on the sale of their existing home and turn to the FHA program for help.

Long-term: this will help keep FHA solvent and help incubate a new consumer psychology that rewards saving instead of spending on credit.

The $10,000 question is whether or not my generation -- the oft-discussed "Gen Y" (can we get a new name, please?) -- will positively respond to this new psychology. Will we be willing or able to scrimp and save several thousand dollars to purchase a home in the years ahead, given the uncertain economic climate and our crippling student loan debts?

The answer to that question will go a long way towards determining the future of the housing market.